Eyes on Wall Street are bored – there will not be the signs of another crisis in D.C. for at least another month – and have turned towards Europe and signs of a deepening recession that have spread even to Germany. I am headed there next week to do some up-close and personal research. The data never tells you what is really going on. I was in Britain in August and the business people I spoke to from Britain, from Spain, Germany, even Sweden, were all worried and telling me things were worsening. And they did.
What to do and why now?
- The first thing to do is avoid the publicity-seeking pundits saying Europe is now cheap. European stocks may have low prices by historical standards but those stocks deserve low prices. And lower ones.
- The second is to play Europe through U.S. banks. Say what? Keep reading.
Why am I pessimistic?
- Greece is melting – some people lack basics such as food or medicine – and it has no ability to grow its way out of the problem. Greece will leave the euro – and banks in Europe will take a hit, especially in Germany.
- Spain will eventually need outside money to fix the banking system and will require even stricter austerity measures. Squatters are now a major rental group – no rent paid, however – and while unemployment levels are not rising, they are still above 25%.
- Germany is slowing down – I guess the Iranians don’t need any more bunkers built or centrifuges – as Asian exporters facing stagnant markets have less need for the industrial equipment that has driven a good deal of Germany’s export boom.
- Britain continues to suffer from the impact of its austerity program.
- Italy is totally stagnant. That is where I am headed next week. It could be the next crisis as Berlusconi tries to reclaim power in the February elections and push out the sane politicians trying to right the country’s economy.
I think I have mentioned enough potential negative factors about Europe you should at least pause before buying the stock or ETF.
The quiet news in Europe
Is there anything good going on? Yes – quietly.
European banks are dumping assets at low prices to shrink their balance sheets — and U.S. banks are buying them on the cheap. This reality has yet to be priced into U.S. bank stock prices for it is hard to measure – but it is quite real. While traders have focused on the mortgage settlement and the upcoming possibility Bank of America (BAC) and Citigroup (C) may be able to pay real dividends or do stock buybacks, they are missing the purchase of profitable assets at very low costs. Take a look at JPMorgan Chase (JPM) and Goldman Sachs (GS) if this interests you.
And if you buy them, please consider selling weekly or monthly options. If you bought JPM as I write this for around $45.50, you could sell a February $47 call for $.60 or $60 a contract. Do that 12 times a year and you have $7.20 in cash – an 18% return plus JPM’s dividend of 2.6% and you have a greater than 20% yield.
Play Europe – not in Europe. Play it here.